If you have set up your own limited company it can be really confusing to know what limited company expenses you are permitted to put through your business. The rules do differ slightly if you are a sole trader or self-employed ...
There are some expenses you can put through which won't reduce your corporation tax bill too which are known as non-tax-deductible expenses. You need to use your bookkeeping package to keep track of what you have claimed and preferably use different account codes for the non-tax-deductible costs so they can be adjusted for at your year-end.
The basic rule, whatever your business structure, is to work out which expenses are allowable in the eyes of the HMRC. Stop and think, are the expenses wholly and exclusively related to the running of your business?
If you buy something which has a dual purpose for your business and for you personally then you should work out the proportion used for the business and only claim that element. Imagine going abroad for a business meeting then staying a few extra days for a holiday. You will need to proportion the costs so you only put through the business-related days and not the whole break.
A good example of when expenses are tax-deductible or not is entertainment, that is paying for a meal for a group of people. If the only ones being paid for are employees then the amounts can be tax-deductible and you can put the whole amounts through your business and claim tax relief on them (adhering to the current per employee limits at the time), but as soon as one person who is not an employee attends the event or meal, like a client or a prospective client, then the whole amount then becomes non-tax-deductible. The company can still pay, but they will need to add back these amounts before working out the corporation tax on the profits at the end of the year.
A few other things which are tax-deductible for a limited company are:
- Business insurance -, but watch out if you run a business from home as there will be some crossover there. I use an insurance broker to ensure I get the right personal insurance for my home and separate business insurance to make sure I am covered correctly.
- Pre-formations costs - if you have started your business, but you previously bought items which you are now using within your business then you can claim start-up costs. Maybe a computer you already bought is now going to be used exclusively by the business or you sought legal or accounting advice before you formed which you need to reclaim?
- Salaries and subcontractor costs - it is often advantageous to pay yourself a salary if your limited company is your only source of income. See my youtube video on this.
- Raw materials - or stock costs for resale.
- Advertising and Marketing - any fees connected with websites, social media, networking meetings and company literature.
- Travel and Accommodation - to business meetings whether they are client-related or just a trip to the bank to see the bank manager or a trip to a networking meeting.
- Bank or finance charges - connected with credit cards, loans, business bank accounts or the many payment services you might use to make it easier for clients to pay you.
- Home Office costs -, but watch out as there are special rules concerning mortgages or rent reclaims. It may be better to use a flat rate to cover costs rather than paying utility bills which could have some question mark on what is for business and what is for the home.
- Office admin - like printing, postage, software costs, accountancy fees and professional (legal) fees.
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- Training and continuous personal development - you need to keep up to date with the latest rules and regulations connected to your industry, or learn about that new social media tool.
- Trivial Benefits - one that is missed by a lot of people and has a blog post all of it's own.
- Professional subscriptions - you may be a member of an industry-specific organisation, or subscribe to magazines connected to your industry.
- Eye tests - if screen work is a large part of the job and glasses or contact lenses if they are required in order to do the screen work.
- Uniform or safety equipment - if you need high viz, steel-toed boots, or you have logo'd clothing or uniform.
The general rule is if the item you bought would be needed whether or not you ran your business then those items should not be put through the business.
Things like travel costs to your normal place of work, child care, doggy daycare, dry cleaning and normal day-to-day clothing are things new business owners often try to claim for, but would generally never be an allowable tax-deductible expense. If you are at all unsure you can claim anyway and risk having a fine or a tax bill if you are ever inspected by the HMRC, or choose not to claim for anything which is not cut and dried.
If you are reclaiming the VAT on items too then you should always keep receipts and evidence of the limited company expenses to back up your bookkeeping should you be inspected, and also when you record the expense in your accounting package, enter enough information so you can remember what it is that you paid for if ever challenged on it.
If anything I've written here resonates with you, call me on 01604 420057 and let's see how we can help you.